HNIs are coming back to large-caps from alternative assets: Mirae Asset

Mirae Asset Global Investments (India) expects low interest rates, government spending, and a good monsoon to support a gradual recovery in the demand environment next year. The fund house believes corporate banks will drive earnings growth in the near term and sees a mean reversion in the stocks that are currently trading at a significant discount to their fair value.

In an interview with Fortune India, Swarup Mohanty, CEO, Mirae Asset Global Investments (India), says, “At a broader index level, mid-cap valuation has moved from a premium of 35% to large-cap to a discount of ~15%. Our investment thesis doesn’t differ based on market cap. However, as an investor, we believe one should have a combination of large-cap as a core portion and the rest towards mid-cap.”

In the past few years, high-net worth individuals (HNIs) have taken a fancy to alternative investment platforms versus large-caps. However, Mohanty points out that some of these investments have not yielded the desired results. He adds, “We believe HNIs have again started allocating to large-cap funds, which have continued to deliver better risk-adjusted returns.“

Furthermore, Mohanty explains there is space for well managed large-cap funds and exchange-traded funds (ETFs) to coexist, as they cater to different segments of retail and institutional investors. “We believe that in India, data is suggesting, it’s getting difficult to beat the benchmark (at least the large-cap indexes) for most funds (as low returns and costs are having a significant impact), but still a few well managed funds, including our large-cap fund, have been able to create decent alpha in this space,” Mohanty says.

Mirae Asset Global Investments (India) hopes to leverage its strong equity franchise to increase its assets under management (AUM) across debt funds and create a track record for ETFs also. The fund house is also in the process of diversifying its business activities in India to enter new segments in the financial services space.

“We feel it is a great time to set up different businesses, as the underlying market seems to be changing to the new demographics of India. It also reflects on the strong view that the Mirae Asset group has on India, and the bright future business possibilities in India,” Mohanty says. Edited excerpts:

When do you expect the growth cycle to start and which lead indicators are you tracking for signs of a revival in economic activity?

In the past few months, the government has announced several steps to arrest the growth slowdown. This, coupled with the Reserve Bank of India (RBI) lowering rates by 135 bps in 2019 and monsoon-led recovery in the rural economy, should help arrest the slowdown in the economy. While we cannot pinpoint the exact time for the growth cycle to restart, we expect a gradual recovery in the demand environment in CY 2020, driven by low-interest rates, government spending, and rural recovery.

We have seen the nominal growth rate slow down to a record low of 6.1% and business confidence is shaky, given the weakness in consumer demand. In this backdrop, do you expect corporate earnings for the broader market to remain subdued in FY21?

Corporate earnings are a function of the underlying economic performance. In the near term, earnings growth is expected to be driven by corporate banks, as their credit cost normalises. Over the medium to longer term as and when the economy picks up and also due to base effect, we should see earnings growth for broader markets to improve.

The current market rally seems to be mainly at an index level since only a few stocks are supporting the market momentum. Do you expect the broader market to pick up and what’s the potential upside for the Sensex and the Nifty in the next one year?

I am not an expert in predicting the Sensex and the Nifty targets and having said that, over the years I have seen the market value of any company is a function of the underlying cash flow it generates. As an investor, we get rewarded, if we continue to invest for the longer term within the earmarked asset allocation. Coming back to the recent market rally, markets seldom trade at fair value and we expect a mean reversion in the stocks that trade at a significant discount to their fair value.

While you are bullish on private sector banks, which other areas present white spaces for growth in the BFSI (banking, financial services, and insurance) sector?

We are positive on private corporate banks and selectively hold some positions in insurance and some high-quality beaten-down NBFCs (non-banking financial companies). We believe the profitable market share gains from PSUs and weaker NBFCs should continue for the above.

Would you bet on select sectors for alpha generation or prefer select stocks for adequate diversification in the portfolio?

We use a bottom-up approach in portfolio construction, while keeping cognizance of the sectoral weight in the benchmarks. Our investment philosophy is to buy quality businesses run by competent management at a reasonable price and holding them for an extended time period.

What’s the investment thesis for mid- and small-caps versus large-caps in the next one year?

In the recent time period, at a broader index level, mid-cap valuation has moved from a premium of 35% to large-cap to a discount of ~15%. Our investment thesis doesn’t differ based on market cap, however, as an investor, we believe one should have a combination of large-cap as a core portion and the rest allocation toward mid-cap.

Are you increasingly seeing HNIs move from large-cap funds to alternative assets?

For a couple of years, HNIs had been allocating more funds to alternate assets. However, in my assessment, some of those have not yielded the desired results, and hence we believe HNIs have again started allocating to large-cap funds, which have continued to deliver better risk-adjusted returns.

What is Mirae’s asset allocation outlook? What are some of the key milestones you aim to achieve next year?

We have had a good year in 2019 with our AUM crossing Rs 40,000 crore, folio count crossing 2.1 million folios and monthly systematic investment plan (SIP) book in north of Rs 450 crore from 900,000-plus folios. We have to continue our growth momentum in 2020 as well. We believe we have created a strong equity franchise which we hope to leverage, and increase our AUM across debt funds and start creating a track record for ETFs with a mix of innovative and basic index ETFs.

Since the past couple of years, we had felt mid-caps were trading at a significant premium, and hence suggest a higher skewed allocation to large-caps. Considering the attractive valuations of mid-caps now, we suggest investors can look at 70:30 allocation between large-cap and mid-caps on the equity side. Also, we are very bullish on the outlook for both the equity and debt segments for 2020, and hence we have a positive stance on our Hybrid Equity Fund, which invests 70-72% in equities (which has larger allocation to large-caps) and the remaining in fixed income.

What’s your assessment of credit quality in the market and outlook for debt funds in the coming year?

Since the credit crisis erupted in late 2018, the markets have shown a distinct preference for taking exposures to very limited well-known names. Therefore, there is a case of clear polarisation wherein only the best of the names are being able to raise money from the capital markets. For others, it is increasingly a challenge to refinance the existing debt or raise fresh money. The situation does not seem to be improving significantly for now. For the strong parent-backed names, the cost of funds has even come down on account of access to a much larger pie of the markets and overall system rates coming down due to adequate liquidity in the system. However, it’s a continuous clean-up process which would take its own time to yield results before one could see any meaningful improvement. After the challenging 2019 for debt markets, we expect regulators as well as the rating agencies to be more watchful now. While the clean-up seems to be done, the market volatility should prevail largely depending on the government policy to support economic growth.

ETF/index-traded funds comprise less than 4% of the mutual fund AUMs, indicating a huge growth potential. As we have seen in many developed countries, do you expect index investing to be the default method for investing in the coming years? Can index funds consistently outperform active large funds?

We have seen good growth in the ETF market globally and in India. We believe that in India, data is suggesting, it’s getting difficult to beat the benchmark (at least the large-cap indexes) for most funds (as low returns and costs are having a significant impact), but still, a few well-managed funds (including our large-cap fund) have been able to create a decent alpha in this space. There is space for both—well-managed large-cap funds and ETFs—to coexist in the market, as they appeal to different segments of retail and institutional investors.

What’s the progress on the plan to hive off the MF business? Has Mirae identified opportunities for investment in venture capital, NBFCs, and real estate?

The Mirae Asset group has made great advances both domestically and internationally in terms of acquiring new business and strengthening our existing base. After 11 years in India as an MF provider, Mirae Asset now desires to diversify its business activities and venture into other areas of financial services. We feel it is a great time to set up different businesses, as the underlying market seems to be changing to the new demographics of India. It also reflects on the strong view that the Mirae Asset group has on India and the bright future business possibilities in India.

Mirae Asset Global Investments will become the parent company in India, while Mirae Asset Investment Managers will be the investment manager for the MF business. We have already given a notice to our investors for the same; from January 1, 2020, we will have a new organisation structure.

What are some of the key challenges you expect in 2020 and what is the underlying investment strategy to manage these risks and generate high returns in different categories?

The key known challenges for 2020 include the pace of economic recovery on the domestic front, and the Brexit and the U.S.-China trade war on the global front. We do not see merit in significant changes in allocation to equities, given that markets are reasonably priced and will lead the earnings recovery. At ~18x forward P/E multiple, the markets are still within the boundaries of reasonable valuations, given that “earnings” is low compared to the long-term average. Overall, we recommend investors to remain committed to equities, i.e. maintain equal weight.